We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

DOL sues insurance brokerage firm – selection of an annuity provider for a terminating pension plan is a fiduciary duty

The Department of Labor (“DOL”) has sued an insurance brokerage firm, and its owner, for allegedly breaching fiduciary duties associated with purchasing an annuity contract for a terminating defined benefit plan. The complaint alleges that in 2003, the firm entered into an agreement to function as an ERISA fiduciary with respect to the purchase, for a fixed fee of $50,000, with no additional compensation. The firm then purportedly arranged to receive an additional $522,047 of compensation from the insurance company that was eventually selected, and falsified information submitted by other bidders so that this insurance company would appear to be the lowest bidder.

These allegations are unusual, and we can assume the defendants have their own story. But there are some takeaways regardless of how this matter proceeds.

First, this case reminds employers that the DOL considers the selection of an annuity provider for a terminating pension plan to be a fiduciary function. The DOL issued a 1995 interpretive bulletin on this topic. The insurance brokerage firm included portions of this bulletin on its website, highlighting that a fiduciary might need the advice of a “qualified, independent expert.” Employers terminating pension plans need to be aware of the DOL’s position, and consider how they are satisfying any fiduciary requirements and minimizing risk of a fiduciary breach claim. In our experience, it is unusual for an insurance brokerage firm to assume the fiduciary responsibility for selection of an annuity provider on behalf of the plan administrator, and an insurance sales person is often compensated by the annuity provider through a commission. So the nature of the representation is important to establish.

Next is a takeaway for service providers to ERISA plans. The DOL is sharply focused on service provider conflicts of interest and compensation. The complaint does not allege that in this terminated trust scenario the participants received less than their vested benefits, or that the insurance company selected was “less safe” than other annuity providers. Accordingly, any dollar loss in this unique situation appears to have been incurred by the employer, rather than the plan, and there may not be any monetary damages for the fiduciary breach claim. But the complaint sets forth an alternative claim: prohibited transaction, for compensation under an arrangement that did not satisfy the prohibited transaction exemption for reasonable arrangements, regardless of whether the defendants were fiduciaries. The facts occurred prior to the new disclosure rules, which limits the claim in this case.

Both employers and service providers are potentially liable for prohibited transactions, and need to consider that the new disclosure rules will make it easier to establish prohibited transaction cases based on service provider failure to disclose potential conflicts of interest and compensation.

Finally, we note that the complaint alleges that the firm’s shareholder is both a party-in-interest and a fiduciary. The bases for these allegations are unclear, but the stakes are high, given that the complaint seeks to permanently enjoin both the firm and the shareholder from serving as fiduciaries or other service providers to any ERISA-covered plans.